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The Virgin Crisis: Systematically Ignoring Fraud as a Systemic Risk
New Economic Perspectives ^ | NOVEMBER 08, 2011 | William K. Black

Posted on 11/21/2011 5:23:08 AM PST by Pelham

The FBI warned in September 2004 that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial “crisis” if it were not contained. The mortgage banking industry’s own anti-fraud experts reported in writing to nearly every mortgage lender in 2006 that:

“Stated income and reduced documentation loans speed up the approval process, but they are open invitations to fraudsters.” ....stated income loans deserve the nickname used by many in the industry, the ‘liar’s loan’”.

We know that accounting control fraud is itself criminogenic – fraud begets fraud. The fraudulent CEOs deliberately create the perverse incentives that that suborn inside and outside employees and professionals...

“Dishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty.... also must include the loss incurred from driving legitimate business out of existence.”

....“Over the last several years, the subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share. The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete.”

Liar’s loans offer what we call a superb “natural experiment.” No honest mortgage lender would make a liar’s loan because such loans have a sharply negative expected value. Not underwriting creates intense “adverse selection.” We know that it was overwhelmingly the lenders and their agents that put the lies in liar’s loans and the lenders created the perverse compensation incentives that led their agents to lie about the borrowers’ income and to inflate appraisals....

“Many originators invent non-existent occupations or income sources, or simply inflate income totals to support loan applications. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer.”

(Excerpt) Read more at neweconomicperspectives.blogspot.com ...


TOPICS: Business/Economy; History; Reference
KEYWORDS: fannie; fraud; liarsloans; subprime
Selected quotes from a very good article with a boring title. It describes the widespread fraud in the mortgage market that created and then collapsed the housing bubble.
1 posted on 11/21/2011 5:23:12 AM PST by Pelham
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To: Pelham

I got a loan using stated income because I am a small business owner.

The lender told me how much money was in my accounts. The application process gives them a lot of access to information. They were making a lot of money and didn’t really care about the downside. Afterall the downside would impact in a couple years, when all they worry about is this quarter.


2 posted on 11/21/2011 5:32:24 AM PST by driftdiver (I could eat it raw, but why do that when I have a fire.)
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To: dangus; rlmorel; Ol' Dan Tucker; RockinRight; org.whodat; SumProVita; blam; SaraJohnson; NVDave; ...

liar loan ping


3 posted on 11/21/2011 5:36:36 AM PST by Pelham (Islam. The original Evil Empire)
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To: Pelham

Good piece.
Synopsis:

Bad money drives out good.
Nothing is going to happen to all of the people who committed fraud causing the mortgage crisis.


4 posted on 11/21/2011 5:40:41 AM PST by bt-99 ("Get off my Lawn")
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To: driftdiver

My friend’s daughter was in the Alt-A lending business, the ‘liar loans’ discussed in the article. During the bubble she was printing money- she lived in a $2 million house and drove a Maserati and a big Mercedes.

I guess she thought the easy money would last forever and she didn’t put any aside. When the bubble collapsed she lost it all and was renting a room from a friend.


5 posted on 11/21/2011 5:41:47 AM PST by Pelham (Islam. The original Evil Empire)
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To: Pelham

Nobody really cares about mortgage fraud, including the local authorities.

My partner and I have witnessed three clear-cut cases of occupancy fraud in our career — each time the borrower buying the house as a primary, but it was really a rental.

The first two we reported to our (former) superiors, and they told us it was too hard to prove.

The last was a borrower who came to us, but when we wouldn’t do it he went to someone who would. We reported it to the city police and local FBI — with documentation of the fraud — and both agencies told us it wasn’t worth pursuing.

At least one of the three, that we know of, has entered foreclosure.


6 posted on 11/21/2011 5:43:40 AM PST by AnglePark
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To: driftdiver
I got a loan using stated income because I am a small business owner.

Well, that was once the legitimate reason for stated income loans. But when the banks realized they could sell off stated income mortgages made to illegal aliens as AAA mortgage-backed securities, things rapidly got out of hand. Now one just about has to have a "job" - no matter how precarious - to get a loan. The bank wants to be sure now that loan applicants are conformists. :)

7 posted on 11/21/2011 5:48:34 AM PST by Mr. Jeeves (CTRL-GALT-DELETE)
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To: bt-99

“Nothing is going to happen to all of the people who committed fraud causing the mortgage crisis.”

That’s sure what it sounds like. I heard the author on last night’s CoasttoCoastAM- in between the UFOs and ghosts they sometimes have good guests. I suspect he might be a political liberal but he does a pretty good job of going after all the vermin regardless of party. Democratic Speaker Jim Wright tried to ruin this guy back in the 80s so he’s probably not much of a partisan.

He pointed out that at the peak of the S&L scandal in the 80s it looked like the crooks had gotten away with it all and wouldn’t be prosecuted for anything. But three or four years later there had been a few hundred successful prosecutions and a lot of them went to jail. He says the problem isn’t the absence of law, it is that the last three administrations have been appointing regulators who are in bed with the industries that they are supposed to be keeping an eye on.


8 posted on 11/21/2011 5:54:27 AM PST by Pelham (Islam. The original Evil Empire)
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To: AnglePark

That has to change or the fraud will keep escalating. Like the article says:
“We know that accounting control fraud is itself criminogenic – fraud begets fraud.”


9 posted on 11/21/2011 5:58:05 AM PST by Pelham (Islam. The original Evil Empire)
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To: AnglePark

Occupancy fraud is one thing that had been around a lot longer than the other stuff, and has made a “comeback” since loan standards have tightened.


10 posted on 11/21/2011 6:32:19 AM PST by RockinRight (The circular firing squad among conservatives has Romney smiling.)
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To: Pelham
We know that accounting control fraud is itself criminogenic – fraud begets fraud. The fraudulent CEOs deliberately create the perverse incentives that that suborn inside and outside employees and professionals...

This is somewhat true. This often gets reported as if the idea that the "incentives" were higher on "liar loans" and per se, that wasn't the case. In and of itself, it wasn't, it was more the fact that with them, they could get a loan done, and without them, they couldn't, meaning there was more potential for income. The way this was worded makes it sound as if taking a borrower who could qualify for a traditional, fully-documented loan would pay more taking them the other route, and it's just not accurate, since to get the higher payout, you'd have to convince them of a higher interest rate, which, with yield spread premium, you could do anyway on a conforming full-doc loan. Where there was more potential for income were the so-called "Option ARMs" which aren't really "subprime", they were more "Alt-A".

11 posted on 11/21/2011 6:35:37 AM PST by RockinRight (The circular firing squad among conservatives has Romney smiling.)
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To: Pelham

The other question is, how far down to you take it? Do you stick with the Angelo Mozillos, or go down to the father of three who took a job as a mortgage loan officer to pay the bills, and got wrapped in because he had mouths to feed and did what his bosses insisted was OK?


12 posted on 11/21/2011 6:38:18 AM PST by RockinRight (The circular firing squad among conservatives has Romney smiling.)
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To: Mr. Jeeves
Now one just about has to have a "job" - no matter how precarious - to get a loan.

Well it WAS that way, but stated income is virtually non-existent now.

13 posted on 11/21/2011 6:39:08 AM PST by RockinRight (The circular firing squad among conservatives has Romney smiling.)
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To: RockinRight

If you want to take the mortgage scam to the root of it’s origin, you would arrive at Ruben, Clinton and leading banksters.

The banks were falsely accused by the Clinton administration of red-lining mortgage loans. They threatened to sue banks for racism. The bank CEOs, being limo-socialists, agree to drop loan standards in the name of quotas and Clinton agree to deregulate the banking industry.

There was no government oversight because the government demanded and created the scam in the name of racial equality in outcome.

We were purchasing a house around the same time it hit the news that Clinton was race-baiting the banks. I was not happy about race being a consideration for a home loan. We were applying for a loan to buy a house and the loan officer asked us our race. I balked and told him we don’t do race classification. I asked what race has to do with a home loan. He got instantly angry (he was a liberal racist) and told me “I don’t have to give you a loan.” I told him to leave and we used a different lender who asked the same race question explaining it was required by the government.


14 posted on 11/21/2011 7:36:57 AM PST by SaraJohnson
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To: RockinRight

Good question.

If the loan officers falsified mortgage apps I don’t see how you can let them go scot free without amplifying the moral hazard that helped this thing grow like it did.

If it was up to me I’d find them guilty and give them suspended sentences. The goal is to discourage fraud in the future rather than extract a pound of flesh from a low level employee.

However there were also self employed mortgage brokers who had no one pressuring them to falsify apps and who decided to do it because the money to be made was huge.


15 posted on 11/21/2011 11:26:50 AM PST by Pelham (Islam. The original Evil Empire)
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To: Pelham
I heard this guy Bill Black on Coast-to-Coast AM last night. I couldn't believe what I was hearing, when he said WaMu had honest appraisers blacklisted. Wouldn't do business with them because they wouldn't inflate the appraisals. Scumbags.

They knew it was a house of cards, and didn't care. They were making huge money.

Almost no one has gone to prison over this widespread corruption. I guess they were wealthy enough to buy off our pols.

16 posted on 11/21/2011 2:06:57 PM PST by FlyVet
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To: SaraJohnson

“There was no government oversight because the government demanded and created the scam in the name of racial equality in outcome.”

It was more than just that. During the Clinton years an anti-regulatory agenda became popular in both parties, the idea that financial markets will regulate themselves with no “cop on the beat” needed.

Al Gore was one of the leading proponents of this theory but it had a load of Republican supporters as well. So laws like Gramm-Leach-Bliley and the Commodities Futures Modernization Act were enacted.

People were selected to run the SEC and OTS and other regulatory bodies who had no intention of regulating anything. Greenspan and Bernanke at the Fed shared this agenda.

The idea didn’t fade away when Dubya took over from Clinton, it continued right through his administration as well.

Excessive regulation has been a problem plaguing American manufacturing, but in the financial markets it’s been just the opposite.

Regulation that had served us well like the Glass Steagall Act were scrapped and a casino mentality was allowed to flourish, with short term gains pushing all other interests aside including the long term survival of the economy.


17 posted on 11/21/2011 6:51:35 PM PST by Pelham (Islam. The original Evil Empire)
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To: Pelham

That is true.


18 posted on 11/22/2011 4:31:04 AM PST by SaraJohnson
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